It's possible but unlikely and there may also be an end in sight for borrowers
Speculation about interest rate hikes in Canada and around the world remains heightened, but are even bigger increases ahead?
The Bank of Canada has taken rates from 0.25% in March to 2.5% currently, including a surprise full-percentage-point hike in July. But will it do so again this week?
A survey of 21 economists by Bloomberg suggests this is unlikely with Governor Tiff Macklem and his team opting instead to raise rates by 75 basis points.
A report from National Bank of Canada (NBC) also expects rates to rise to 3.25% this Wednesday with new policy guidance hopefully giving a clearer picture of the central bank’s subsequent moves.
Senior Deputy Governor Carolyn Rogers will give an Economic Progress Report on Thursday afternoon.
NBC’s team says it will “be looking for clues that the Bank is considering taking its foot off the brake—perhaps by emphasizing the need to be ‘data dependent’ going forward.”
Halting the hikes
Stopping the rate hikes is something that two of Bloomberg’s panel think will happen after this month’s hike, with a further 11 believing there will be one more increase in October.
While the remaining eight of the panel may be expecting further hikes, this would only be if the size of increases slows, as none of the 21 see the BoC’s policy rate exceeding 4%.
However, the overall impact of the rate increases in Canada and the United States will bring a recession that will force the BoC to reduce rates to stimulative levels by mid-2024, Macquarie economist David Doyle told Bloomberg.
Housing market impact
The 4% ceiling for interest rates could be breached if Canadian housing market activity causes the BoC a problem.
With activity in the Toronto market up 11% month-over-month in August, even the easing of red-hot prices may not be enough to deter policymakers from going further according to BMO economist Doug Porter.
In a note to clients last Friday, Porter wrote that the BoC would not be pleased to see a revival of the housing market or even its stabilization this soon.
“Any sign that the most interest-sensitive sector of the economy is holding up surprisingly well will be a clear signal that more tightening than expected may yet be required,” Porter warned.
BMO believes that the central bank will hike rates by 75 basis points this week, then a further 25 basis points later to a “3.50% endgame, but with clear upside risks.”
